17.01.2018 | Sri Lankans sceptical of China’s investment rush

Walking along Galle Face Green, the ocean-side urban park just south of Fort, Colombo’s financial district, it is hard not to notice the frenetic activity along the Sri Lankan coastline. A long line of trucks carry building materials to the adjacent port. There, dredgers busily reclaim land, pumping vast quantities of sand from the sea floor. Slowly, the foundations for Port City Colombo are beginning to take shape; a development which locals are quick to point out is financed by China.

Port City Colombo promises to be a game-changer for a country which is still recovering from the 2004 tsunami and a 26-year civil war that ended in 2009, with the government hoping the development will help Sri Lanka become a trading hub between Europe, Africa, the Middle-East and Asia.

The development will also serve as an international financial centre – conveniently located half way between Dubai and Singapore – providing direct access to the rapidly developing markets of the Indian subcontinent; in the process, the government hopes, attracting overseas investors and increasing local employment opportunities. Colombo officials anticipate the new port will generate $18 million in foreign investment over the next 25 years.

Sri Lanka’s strategic location in the middle of the Indian Ocean enabled it to become a centre for east-west commerce between the fifth and fourteenth centuries, when merchants from Africa, Persia, China and India would use the island to trade silks, fabrics, wines and ceramics, among other goods. Those links are now being revived, with Beijing counting on Sri Lanka to play a central role in its ‘One Belt, One Road’ policy, the development of Eurasian transport infrastructure and trading routes along the old silk roads.

However, many Sri Lankans are wary of Chinese investment in major infrastructure projects. Port City Colombo is one of a number of projects the Chinese have undertaken in the country since the end of the civil war in 2009, with Beijing responsible for financing and building ports, roads, railways and airports nationwide. Some of the ventures have sparked controversy, dismissed as vanity schemes or white elephants – Mattala Rajapaska International Airport has been dubbed the emptiest in the world. More worryingly for Colombo, the projects have left China owning $8 billion in Sri Lankan debt, and much of it is collateralised against key assets, which are expected to be significantly profitable in the long run. The southern port of Hambantota is a notable example.

In December 2017 Sri Lanka handed the port to China on a 99-year lease in a debt-to-equity swap which wiped $1.1 billion off the former’s liabilities. Under the arrangement, a joint venture between state-controlled China Merchants Port Holdings and the Sri Lanka Ports Authority owns the leasehold for the port and 15,000 acres of adjacent land, earmarked for an industrial zone. The deal, in which the Chinese partner holds a 70% stake, has been likened to the former British lease of Hong Kong during the 20th century. It has received widespread criticism from Sri Lankans who view it as undermining Sri Lankan sovereignty.

Beijing’s involvement in Port City Colombo has sparked similar fears. Although the project is financed with Chinese foreign investment – unlike the Hambantota project which started out as a Sri Lankan development backed by Chinese loans – China will still control a large proportion of the Colombo project. It is being constructed and financed by the China Harbour Engineering Corporation, a subsidiary of the state-owned China Communications Construction, in return for a 99-year lease on 110 hectares of the development, amounting to 40% of the land area.

Sri Lankan President Maithripala Sirisena aims to address concerns over China’s growing stake in the country by expanding commercial ties with other countries in the region. Talks to sign free trade agreements with China and Malaysia are under way, while Singapore Prime Minister Lee Hsien Loong is scheduled to conclude such a trade deal between Singapore and Sri Lanka on an official visit in late January. Elsewhere, the Economic and Technology Cooperation Agreement (ETCA), which seeks to expand Sri Lanka’s free trade agreement with India, from goods to services and investments, is expected to be finalised by June 2018.

While Colombo hopes such deals will stimulate significant investment and enable its main exports of tea and textiles to boom, some Sri Lankans worry the country will lose out to foreign business. Right now though, the focus of current anxiety is the international financial centre at Port City Colombo. Construction of the development is set to generate tens of thousands of jobs, and the foreign finance it is expected to attract is seen by the authorities as crucial to reducing the country’s $64.9 billion debt burden. Yet for all the positives, critics continue to argue that the port may do little to help local businesses prosper and even undermine national sovereignty. The government knows that winning the argument will not only be central to the success of this development but could also determine the limits of future Chinese investment in the country.

Click here to read an abridged version of this Alaco article in the South China Morning Post.